THIS CASE STUDY EXEMPLIFIES THE APPLICATION OF KEY LEGISLATIVE REQUIREMENTS FOR ELIGIBLE SR&ED ACTIVITIES AS THEY APPLY TO RELEVANT ACTIVITIES IN THE FOOD AND BEVERAGE INDUSTRY.
BUSINESS SCENARIO
Bryan Beef is a privately owned manufacturer of processed beef products for the food and retail industries in Canada. As part of the food and beverage industry, Bryan Beef is constantly focusing on new product development to remain competitive in the field. It is regularly conducting SR&ED activities to come up with new products relating to food safety, cost reduction, organic/natural products, dietary guidelines and sustainable resources.
To keep up with the times, Bryan Beef launched an SR&ED project with the main business objective being to produce certified organic beef products. In order to do this, Bryan Beef had to completely reinvent its manufacturing process.
Bryan Beef had never claimed the SR&ED tax incentive before, and believed its activities would not qualify. To be eligible, Bryan Beef had to meet the definition of SR&ED in subsection 248(1) of the Income Tax Act (see Commentary below). After meeting with a specialist, Bryan Beef realized it was eligible for the credit.
BRYAN BEEF’S ELIGIBLE SR&ED ACTIVITIES
The R&D tax credit specialist helped Bryan beef determine its qualifying SR&ED activities, many of which were part of the company’s daily operations. Bryan Beef’s qualified research expenses (QRE) included:
- Development of new or improved product formulations to meet changing consumer preferences;
- Development of new packaging to extend the shelf life of products;
- Modifications to existing manufacturing processes to comply with new regulations;
- Development of manufacturing processes to accommodate new products or optimize processing;
- Automation of manufacturing functions to minimize product contamination;
- Continuous improvement projects aimed at reducing scrap, waste, and spoilage and/or conserving water and utilities; and
- Machine layout design changes to reduce manufacturing time and increase production.
Bryan Beef claimed the federal SR&ED tax incentive and a sustainable methodology was also established to help the company identify, document and substantiate eligible SR&ED projects and costs on an ongoing basis.
COMMENTARY
To qualify, the work must meet the following definition of “scientific research and experimental development” (SR&ED), as defined in subsection 248(1) of the Income Tax Act.
“Scientific research and experimental development” means systematic investigation or search that is carried out in a field of science or technology by means of experiment or analysis and that is:
(a) basic research, namely work undertaken for the advancement of scientific knowledge without a specific practical application in view;
(b) applied research, namely work undertaken for the advancement of scientific knowledge with a specific practical application in view; or
(c) experimental development, namely, work undertaken for the purpose of achieving technological advancement for the purpose of creating new, or improving existing, materials, devices, products or processes, including incremental improvements thereto;
and, in applying this definition in respect of a taxpayer, includes:
(d) work undertaken by or on behalf of the taxpayer with respect to engineering, design, operations research, mathematical analysis, computer programming, data collection, testing or psychological research, where the work is commensurate with the needs, and directly in support, of work described in paragraph (a), (b), or (c) that is undertaken in Canada by or on behalf of the taxpayer.
WHAT RECORDS AND SPECIFIC DOCUMENTATION DID BRYAN BEEF KEEP?
Similar to any tax credit or deduction, Bryan Beef had to save business records that outlined what it did in its SR&ED activities, including experimental activities and documents to prove that the work took place in a systematic manner. Bryan Beef saved the following documentation as evidence:
- Project records/ lab notes
- Conceptual sketches
- Design drawings
- Photographs/ videos of various stages of build/ assembly/ testing
- Prototypes
- Testing protocols
- Results or records of analysis from testing/ trial runs
- Tax invoices
By having these records on file, Bryan Beef confirmed that it was “compliance ready” — meaning if it was audited by the CRA, it could present documentation that illustrated the progression of its SR&ED activity, therefore proving its SR&ED eligibility.
